The Coffee Bean & Tea Leaf : Malaysia Industry Analysis Mohd Rizal Kismath Batcha 2007

The Coffee Bean & Tea Leaf

Malaysia Industry Analysis

The coffeehouse business has grown every year. Lifestyle factors converge to make the coffee
industry strong at all times. Coffeehouse is a place for fast-paced Malaysians to consider passing by as
a part of their day. As coffeehouses provide calm, invigorating ambiance for people to socialize, relax
or catch up on work.
Entertainment on weekend nights draws a young group of enthusiastic customers. The surge in
interest in coffee drinking among young people assures a diverse, receptive, sophisticated customer
base now and in the future. Besides, many young people now more keen on meeting each other in
coffeehouse during the blind date through net.
Like mentioned just now in opportunity of changing lifestyle, older adults also enjoy the fact
that for the relatively modest price of a cup of coffee and snack, they can meet with their friends, relax
or work. Instead of going to a bar and paying for an alcoholic drink or a restaurant where a meal
usually comes with a hefty price tag, the coffeehouse is an intimate yet inexpensive venue. Thus, the
young generation will be an important target market in the future.
Coffee drinking is now an all-day activity. Once concentrated in the early morning hours or
mid-afternoon, in recent years coffee drinking has become an all-day activity. Even late at night, many
coffeehouses are packed with patrons. It's not unusual for a well located coffeehouse to exceed a daily
average of 900 customers. Obviously, the business of coffeehouse is definitely will continue to grow
intensely.
In order to understand the tough competitive environment among food and beverage industry,
we have used the five forces competitive model. Here we examine the current and future relationship
between The Coffee Bean & Tea Leaf competitors, potential new entrants in the market, substitute
products, the power of suppliers and the buyers.
The Coffee Bean & Tea Leaf : Malaysia Industry Analysis Mohd Rizal Kismath Batcha 2007

PORTER’S FIVE FORCES MODEL

The Porter 5 forces analysis is a framework for industry analysis and business strategy development
developed by Michael E. Porter in 1979. It uses concepts developed in Industrial Organization (IO)
economics to derive 5 forces that determine the competitive intensity and therefore attractiveness of a
market. Porter referred to these forces as the microenvironment, to contrast it with the more general
term macro environment. They consist of those forces close to a company that affect its ability to serve
its customers and make a profit. A change in any of the forces normally requires a company to re-assess
the market place.

Threat of
New entrants

Power Industry Power of

of
Suppliers Competitors Buyers

Threat of
Substitutes

1. Threat of New Entrants

As Michael E. Porter described in his book, Competitive Strategy (Porter 1980), new entrants to an
industry bring new capacity, the desire to gain market share, and often substantial resources. As a
result, prices could be bid down or incumbents' costs inflated hence reduce profitability. Moreover, the
threat of entry into an industry depends on the barriers to entry. If barriers are high and/or the new
comer can expect sharp retaliation from entrenched competitors, the threat of entry is low.
The Coffee Bean & Tea Leaf : Malaysia Industry Analysis Mohd Rizal Kismath Batcha 2007

In Malaysia, you can only find two types of coffee houses. Restaurants, which serve besides
other beverages also instant coffee and The North American style specialty coffee chain stores. The
Coffee Bean & Tea Leaf belongs to the second category. This differentiates itself from other prospects
such as product differentiation and services. For new entry, we mainly analyse the ones falling into the
same category as The Coffee Bean & Tea Leaf and competing head to head with The Coffee Bean &
Tea Leaf.
The Coffee Bean & Tea Leaf® and also Starbucks position themselves to their clients as the
third space to relax, other than work and home. Therefore, customers could indulge themselves into the
third place. They both focus on providing a relaxing and special atmosphere to clients. The selling
point is not only the specialty product they are selling, more importantly, the setting of the store, the
background music, the atmosphere and the environment, all of which differentiate The Coffee Bean &
Tea Leaf® from its local competitors. Therefore, the copycat of The Coffee Bean & Tea Leaf® could
copy the products, the operational style and the decoration, but it is difficult to copy the atmosphere
and the service, which represent the core of western lifestyle. These are the key successful factors and
competitive advantages of the services of The Coffee Bean & Tea Leaf®.
New entrants have to have the economics scale to be competitive, while providing North
American-style specialty coffee, unique atmosphere, and high quality client services. In order to
compete with Best Coffee, they require an initial investment that is not too expensive but a high
switching cost. Hence, the barriers to entrants are medium to high.

2. Power of Buyers
In a tea drinking country, coffee stands for the western culture. Even though at this stage coffee is
accepted by certain clients in Malaysia, it becomes more and more popular among young generation,
especially those who get education overseas. Because of demographic background and consumption
power differences, Malaysian drinkers have different perception, understanding and expectations on
different coffee houses. The target age group falls into the range of 18 to 35 in Malaysia who usually
has decent jobs, stable disposable incomes, and understands or tries to understand western cultures and
lifestyles. Elderly people feel more comfortable drinking tea due to the deep influence of Malaysian
traditional culture.
The Coffee Bean & Tea Leaf : Malaysia Industry Analysis Mohd Rizal Kismath Batcha 2007

On the other hand, youth under 18 have great curiosity about coffee or anything related to
western cultures, but they do not have sufficient or stable income to support their regular coffee
drinking habit. Therefore, the majority of junior clientele may become first-time drinkers while not
necessarily becoming regular visitors to the coffee shops. The main clientele between the ages of 18 to
35 possess comparatively more stable disposable income and are willing to spend their money on
something that can make them feel better and improve the quality of their lives.
Among Malaysian people, coffee stands for western culture and ideology. Sipping a cup of
coffee, with a strange foreign name, on a relaxing afternoon represents a higher standard of life in
Malaysia. In addition, discussing business in a warm and nicely designed coffee shop becomes more
popular in Malaysia, because of the comfortable environment and casual atmosphere. This service The
Coffee Bean & Tea Leaf® offers, finds a huge clientele in Malaysia. They do not only offer the service
of making a good coffee, but also of creating a nice atmosphere of relaxation and pleasure. Without
offering the service of a nice environment, this target group cannot be addressed.

3. Power of Suppliers
The term 'suppliers' comprises all sources for inputs that are needed in order to provide goods or
services. Suppliers are the businesses that supply materials & other products into the industry. The cost
of items bought from suppliers (e.g. raw materials, components) can have a significant impact on a
company's profitability. If suppliers have high bargaining power over a company, then in theory the
company's industry is less attractive. The bargaining power of suppliers will be high when many buyers
and few dominant suppliers exist in the market and when there are undifferentiated, highly valued
products
. The basic coffee supply for The Coffee Bean & Tea Leaf® includes coffee beans, cups and
lids, dairy products, pastries, straws, napkins, sugar and many other customer service items with The
Coffee Bean & Tea Leaf® logo. Regarding The Coffee Bean and its franchising system, once will see
that The Coffee Bean & Tea Leaf® will not rely on any local supplier in a foreign market they have
entered. Referring to them: “For more than 40 years, The Coffee Bean & Tea Leaf® has remained true
to our vision: to bring our customers the most extraordinary collection of coffees and teas from the
world's most exclusive growing estates.
The Coffee Bean & Tea Leaf : Malaysia Industry Analysis Mohd Rizal Kismath Batcha 2007

In keeping with that vision, we proudly offer our premium products through our amazing
franchisees located in 15 international countries around the world and growing!” Therefore The Coffee
Bean & Tea Leaf® must ensure that the type and quality of coffee it offers to its customers must always
be the same. Regardless of which country or city, also focus on service quality. For instance, no matter
what Coffee Bean Store you will enter, you will always receive the same type of coffee cup with the
same company logo on it.
Further, the interior decoration must always be the same in every company store. To ensure
these services, the trustful and experienced franchising must be selected by the The Coffee Bean & Tea
Leaf®. These local franchisees must select the right local suppliers that are able to supply the stores
with premium products in order to provide premium services. The coffee itself is obtained from
countries as Columbia, Sri Lanka and Ethiopia. There, people get trained in order to grow the premium
coffee The Coffee Bean provides in many countries of the world. This coffee will therefore be shipped
in every country of the world, to ensure that every “Coffee Bean coffee” has the same taste and quality.

4. Threat of substitutes
In Porter's model, substitute products refer to products in other industries. To the economist, a threat of
substitutes exists when a product's demand is affected by the price change of a substitute product. A
product's price elasticity is affected by substitute products - as more substitutes become available, the
demand becomes more elastic since customers have more alternatives. A close substitute product
constrains the ability of firms in an industry to raise prices.
The threat of substitute products does not really exist for The Coffee Bean & Tea Leaf®. There
are many small Malaysian restaurant houses. But as above mentioned these restaurant houses do attract
a different clientele. The Coffee Bean & Tea Leaf® does differentiate itself not only because of the
premium coffee but particularly because of its service. Small restaurants houses cannot keep up with
this kind of service they offer. They can neither copy the atmosphere provide nor the weekly premium
offers of new products.
The customers of The Coffee Bean are living the lifestyle of The Coffee Bean & Tea Leaf®.
Therefore even if the Malaysian restaurant offers cheaper instant coffee, they cannot compete with this
kind of lifestyle. Further the small shops offer the “Nescafé Ice Coffee”. But also this kind of product is
not comparable with the service and atmosphere The Coffee Bean & Tea Leaf® offers.
The Coffee Bean & Tea Leaf : Malaysia Industry Analysis Mohd Rizal Kismath Batcha 2007

5. Industry Competitors
In the traditional economic model, competition among rival firms drives profits to zero. But
competition is not perfect and firms are not unsophisticated passive price takers. Rather, firms strive for
a competitive advantage over their rivals. The intensity of rivalry among firms varies across industries,
and strategic analysts are interested in these differences.
The biggest competitor of The Coffee Bean & Tea Leaf® in Malaysia is definitely Starbucks.
Starbucks as a Western Coffee specialty addresses the same target group as The Coffee Bean & Tea
Leaf®. Therefore, the most important thing to compete with Starbucks is to improve its services. Both
Starbucks and The Coffee Bean & Tea Leaf® stick out because of services that Malaysian restaurants
do not offer. Exactly, there are no other competitors that can compete with them on the same level.
Both The Coffee Bean & Tea Leaf® and Starbucks have developed a strong and successful business by
adhering to its core values: offer customers the best coffees and teas from around the world, hire
friendly staff from the local community, and provide a clean comfortable place for customers to relax
while they enjoy their purchase.
In order to distinguish oneself from Starbucks, The Coffee Bean & Tea Leaf® needs to improve
on its services. They have already done a good job by offering a variety of services from “Party Packs”
customers can order when throwing a house or office party to a wide array of “Merchandise to Go”
items as mugs, brew items and cd´s. The Coffee Bean & Tea Leaf® provides the services of giving the
customer the possibility to bring The Coffee Bean & Tea Leaf® Lifestyle back to their homes. Further,
The Coffee Bean & Tea Leaf® offers different promotion that customers can view online on the The
Coffee Bean & Tea Leaf® homepage. Customers receive the chance to get informed about latest
products and special offers, which they can purchase even online.